What is a good fixed charge coverage ratio?

A ratio above 1.0 times means earnings exceeded fixed charges in the period; below it, they did not. Beyond that, the level that makes sense depends on how predictable the business is and on which version of the ratio is used, since a form that also deducts capital spending, tax and distributions reads lower than one that does not. A covenant level is agreed in each facility, and figures quoted on the internet may describe a different definition from the one in a given agreement.

What counts as a fixed charge?

A payment the business must make regardless of how it trades. Rent, lease payments, interest and scheduled loan repayments are the usual list. Some agreements add equipment hire, insurance or preference dividends. Discretionary spending, optional prepayments and non-cash charges are generally left out. In a covenant the agreement sets the list, so the same business can show different ratios under two agreements, and a reader asks which definition produced the number.

Is fixed charge cover the same as DSCR?

They are close relations. DSCR divides earnings or cash by interest and scheduled principal; fixed charge cover adds rent, or other fixed obligations, to both sides. For a business with very little rent they give nearly the same answer. For a business with heavy rent they can differ widely, even though they reach 1.0 times at the same point. The wider ratio is more informative when rent is a large share of what must be paid.

How does IFRS 16 affect the fixed charge coverage ratio?

It changes the inputs, and it need not change the answer. With leases on the balance sheet, rent is replaced by depreciation and lease interest, EBITDA rises by about the rent, and the cash payments appear in the cash flow statement as interest and lease principal. If those lease payments stay in the denominator and rent is not added back a second time, the ratio is much the same. Many agreements freeze the old accounting to avoid the argument.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Fixed Charge Cover Ratio: a Worked Example

The landlord is paid first, and the ratio should say so.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A lender uses fixed charge cover when the bank is not the borrower's largest creditor in practice. Where rent outweighs loan repayments, debt service cover alone can read 3.0 times on a business that has far less room than that implies. The ratio adds rent to both sides: earnings before rent, over rent plus interest and scheduled principal. Some agreements, particularly in the United States, also take capital spending, tax and distributions from the earnings. The extra line matters because rent does not fall when sales do, so the earnings available to pay every fixed claim are thinner than the headline suggests.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

PART OF Credit Analysis for Beginners

// 01 — WHY RENT SITS BESIDE THE BANK

A business with many leased sites has made two sets of promises: to its lenders and to its landlords. In a bad year neither can be skipped without consequences, and a landlord who is not paid can retake the premises the earnings come from. A ratio that counts only the bank's claim shows part of what the business has to meet.

Rent also reshapes the risk. A retailer, a hospitality operator or a leisure business with most of its costs fixed sees a small fall in sales become a large fall in profit. A lender reading debt service on earnings struck after rent is looking at a figure that has already absorbed that operating gearing, and it can look further from trouble than it is.

// 02 — HOW IT IS CALCULATED

FCCR = (EBITDA + rent) ÷ (rent + interest + scheduled principal)

A wider covenant form, common in US lending:

FCCR = (EBITDA + rent − maintenance capex − tax − distributions)

÷ (rent + interest + scheduled principal)

A textbook form: (EBIT + rent) ÷ (rent + interest)

The form in force is the one the document describes. There is no single market definition: agreements vary in which of the deductions they take, whether capital spending is limited to the part not financed, and whether other fixed obligations, such as equipment leases, count as well. Textbook versions often omit principal altogether, which makes them a lease-adjusted interest cover rather than a test of all fixed payments.

Lease accounting creates a trap. Accounts prepared under IFRS 16 and its New Zealand and Australian equivalents move most rent out of operating costs and replace it with depreciation and lease interest, and UK accounts under FRS 102 follow for periods beginning on or after 1 January 2026. Reported EBITDA is then already struck before most rent. To add the rent back again is to count it twice. Accounts on older or simpler frameworks still show rent as an operating cost, and a lender works out which it is holding before starting. Short-term and low-value leases, where the exemption is used, and rent that varies with turnover stay in costs either way.

// 03 — THE EXAMPLE

A tenpin bowling operator with nine leased centres, constructed for this page like every figure in it, has sales of US$30.0m and EBITDA, after rent, of US$6.0m. Rent is US$5.0m, interest US$0.7m and scheduled principal US$1.3m. It spends US$1.2m on maintaining lanes and machines, pays US$0.6m in tax and distributes US$0.4m. Variable costs are such that 60 cents of every lost sales dollar comes off earnings.

Debt service cover: 6.0 ÷ (0.7 + 1.3) = 6.0 ÷ 2.0 = 3.00×

Fixed charge cover: (6.0 + 5.0) ÷ (5.0 + 2.0) = 11.0 ÷ 7.0 = 1.57×

The wider form: (11.0 − 1.2 − 0.6 − 0.4) ÷ 7.0 = 8.8 ÷ 7.0 = 1.26×

Double-counted rent, on post-IFRS 16 accounts:

(11.0 + 5.0) ÷ 7.0 = 2.29× ← wrong

Sales down 10%: earnings fall 3.0 × 60% = 1.8

Debt service cover: 4.2 ÷ 2.0 = 2.10×

Fixed charge cover: 9.2 ÷ 7.0 = 1.31×

Fall to 1.00× on either ratio: US$4.0m of earnings

as a share of 6.0 (after rent) = 67%

as a share of 11.0 (before rent) = 36%

sales fall needed: 4.0 ÷ 0.6 = 6.67, or 22%

The last three lines carry the point. Both ratios hit 1.00 times at exactly the same place, US$4.0m of lost earnings, because rent is on both sides of one and already deducted in the other. But 3.0 times reads as room for a two-thirds fall, when the earnings exposed to a bad year are those before rent. A 22% fall in sales uses all of it. The levels are the example's, not a market norm.

// 04 — HOW IT DIFFERS FROM DSCR AND RENT COVER

Debt service cover and fixed charge cover share one dollar margin, the same US$4.0m here, and set it against two different totals. Above 1.0 times, the larger total pulls the second figure down, and the more rent a business pays, the further it falls. The bowling operator's rent is two and a half times its debt service, so its two figures sit far apart; a freehold manufacturer's would barely differ.

Rent cover looks from the other side of the same lease: a landlord's or a property lender's test of how many times the tenant's earnings pay the rent, with the bank left out. Lease-adjusted leverage treats the same rent as debt on the balance sheet, measuring the size of the load where fixed charge cover measures the annual payment.

DEFINED IN ONE PARAGRAPH → · DEBT SERVICE COVER → · EBITDAR →

// 05 — WHERE IT DECIDES A FILE

It bears on which covenant a multi-site borrower carries. A debt service test on earnings after rent starts from a high number, and a reader of the certificate can take that for room. A fixed charge test shows the same margin against everything that has to be paid, which is the reason a lender to a rent-heavy business may ask for it, and the reason the borrower argues about which deductions go in.

It also shapes what a lender asks about the leases: when they expire, whether rent reviews or turnover clauses will lift the charge, and which sites lose money and could be closed if the lease allows it. A store closure programme that sheds rent improves the ratio only once the lease has gone, and a surrender premium can cost more than the rent it saves in the first year. The ratio shows the load; the lease schedule shows how quickly it can change.

LOAN COVENANTS, EXPLAINED → · HOW BANKS READ RETAILERS →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

IFRS Foundation, IFRS 16 Leases — overview of the standard — A lessee recognises a right-of-use asset and a lease liability for leases longer than 12 months unless the asset is of low value — section 02.
Financial Reporting Council, FRS 102 Explainer: a summary of the Periodic Review 2024 changes for financial statements users, June 2026 — UK lessees bring most leases on balance sheet for periods beginning on or after 1 January 2026, with rental expense replaced by depreciation and interest — section 02.

// QUESTIONS PEOPLE ASK

What is a good fixed charge coverage ratio?: A ratio above 1.0 times means earnings exceeded fixed charges in the period; below it, they did not. Beyond that, the level that makes sense depends on how predictable the business is and on which version of the ratio is used, since a form that also deducts capital spending, tax and distributions reads lower than one that does not. A covenant level is agreed in each facility, and figures quoted on the internet may describe a different definition from the one in a given agreement.
What counts as a fixed charge?: A payment the business must make regardless of how it trades. Rent, lease payments, interest and scheduled loan repayments are the usual list. Some agreements add equipment hire, insurance or preference dividends. Discretionary spending, optional prepayments and non-cash charges are generally left out. In a covenant the agreement sets the list, so the same business can show different ratios under two agreements, and a reader asks which definition produced the number.
Is fixed charge cover the same as DSCR?: They are close relations. DSCR divides earnings or cash by interest and scheduled principal; fixed charge cover adds rent, or other fixed obligations, to both sides. For a business with very little rent they give nearly the same answer. For a business with heavy rent they can differ widely, even though they reach 1.0 times at the same point. The wider ratio is more informative when rent is a large share of what must be paid.
How does IFRS 16 affect the fixed charge coverage ratio?: It changes the inputs, and it need not change the answer. With leases on the balance sheet, rent is replaced by depreciation and lease interest, EBITDA rises by about the rent, and the cash payments appear in the cash flow statement as interest and lease principal. If those lease payments stay in the denominator and rent is not added back a second time, the ratio is much the same. Many agreements freeze the old accounting to avoid the argument.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · CAPACITY

Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.

Is three times the same risk for both?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHFixed charge cover ratio (FCCR) What is fixed charge cover, and when does a desk use it instead of DSCR?